May 15 (Bloomberg) -- Two weeks after Royal Dutch Shell Plc
and Platts changed the way more than half of the world’s crude
is valued, the companies along with BP Plc and Statoil ASA are
being probed by European antitrust regulators about potential
manipulation of oil prices.

The investigation by the European Commission shines a light
on how price reporting companies including Platts, the energy
news and data provider owned by McGraw Hill Financial Inc., help
determine the cost of raw materials used in everything from
plastic bags to jet fuel. The suspected violations are related
to the Platts’ Market-On-Close assessment process, or so-called
window, and may have been ongoing since 2002, Statoil said.

“The industry has developed a high degree of reliance, you
can almost call it dependence, on price reporting agencies,”
said John Driscoll, the managing director of JTD Energy Services
Pte., a Singapore-based energy advisory, and former trading
manager at GS Caltex. “They have tremendous discretionary power
in their ability to interpret and publish prices.”

Platts has been assessing the cost of oil since at least
1923 when its founder, Warren Platt, started Platt’s Oilgram, a
daily newsletter devoted to prices and market information. The
influence of reporting companies has grown since the mid-1980s
when the industry began using market prices instead of a system
where they were set by international oil companies and the
Organization of Petroleum Exporting Countries.

Underpins Trading

The assessments made by reporting companies underpin long-term contracts, short-term, or spot transactions, futures
settlements and derivatives. Total SA, Europe’s third-biggest
oil company, estimates as much as 80 percent of all crude and
oil product deals are linked to reference prices including those
published by Platts, while as much as 20 percent use trades on
the New York Mercantile Exchange or ICE Futures Europe.

Among pricing companies, Platts assessments represent as
much as 95 percent of crude trades and 90 percent of oil
products and over-the-counter derivative deals, Total said in a
submission to a report on oil pricing last year.

Platts determines daily prices in the over-the-counter
energy markets in one of two ways, the first being transactions
made online during prescribed times, known as the Market-on-Close window, a process in place since 1992 and used only for
selected products that have industry-agreed specifications. The
second method involves employees discussing prices with market
participants each day and then determining the daily settlement.

Price Time

These methods in the so-called physical markets contrast
with the daily prices seen for exchange-traded futures ranging
from Brent and West Texas Intermediate crudes to Nymex gasoline,
which trade almost around the clock in a forum for all to see.
The principle of the MOC is that Platts determines prices at a
particular time, for example 4:30 p.m. in London.

European regulators haven’t specified the markets they are
probing or the pricing methods in question, saying only that
“companies may have colluded in reporting distorted prices to a
Price Reporting Agency to manipulate the published prices for a
number of oil and biofuel products.”

U.K. Deputy Prime Minister Nick Clegg said allegations of
price fixing in the oil market are “incredibly serious,” while
answering questions in Parliament.

Kathleen Tanzy, a Houston-based spokeswoman for Platts,
today said the company didn’t have anything to add beyond its
confirmation yesterday that the European Commission has
undertaken a review at its office in London in relation to its
price assessment process.

Platts Window

Traders typically communicate information to reporters via
instant messenger or telephone. Companies are under no
obligation to report trading activity or partake in the MOC
process. Platts also has no legal authority over them. If a
company doesn’t adhere to the rules or perform on a trade that
it reported in the MOC, Platts can refuse to recognize its bids,
offers or trades in the assessment process. The risk of not
participating is that the company loses influence over the
setting of prices.

Only Platts customers can view the window and any
registered company can post bids and offers.

Weighted Averages

The MOC process replaced a system whereby reporters made
assessments based on volume-weighted averages. This methodology,
favored by competitors including Argus Media Ltd., takes into
account deals done throughout the day. Platts moved away from
this process because it was concerned it could result in
assessments that lag actual market levels and aren’t repeatable,
Bassam Fattouh, director of the oil and Middle East program at
the Oxford Institute for Energy Studies, said in a January 2011
report on oil pricing.

The influence of price reporting companies stretches beyond
crude and oil products. The assessments published by Platts and
its competitors including Argus and ICIS, a unit of Reed
Business Information, are used to price the raw materials used
in the $2.2 trillion global base chemical industry as well as
coal, power, metals, emissions, liquefied natural gas and
shipping rates.

While some traders of energy commodities such as crude,
fuel oil and diesel are willing to be identified by the price
reporting services, the companies trading in less transparent
markets such as polyethylene, coal, LNG and metals typically
provide information on the understanding their identities and
those of their counterparties won’t be published.

Dated Brent

High-volume contracts such as North Sea Dated Brent are
well-supplied with data from traders. Other markets rely on
reporters calling companies to gauge price levels, and depend on
their sources being honest when they report their views. For
commodities that are not traded or reported every day, price
assessors can take into account information such as feedstock
costs to determine the price at which trades would take place
theoretically.

“Market participants are under no legal or regulatory
obligation to report their deals to price reporting agencies or
any other body,” Fattouh said in the report. “Whether
participants decide to share information depends on their
willingness, their reporting policies and their interest in
doing so.”

Quality Premium

Platts said in March it would introduce a quality premium
for Ekofisk and Oseberg crudes, two of the four crude grades
that make up the Dated Brent marker used to price more than half
the world’s oil. The changes, which started on May 1, were
designed to boost trading liquidity and to take into account
their superior quality over the other two grades, Forties and
Brent, which make up Dated Brent, Platts said at the time. That
came after Shell made adjustments to its trading contract.

The European investigation marks the third time global
pricing benchmarks have drawn the regulators’ scrutiny in the
past year following investigations into bank manipulation of the
London interbank offered rate, or Libor, and ISDAFix, the
benchmark for the $379 trillion swaps market.

The International Organization of Security Commissions
concluded in October that price assessments could be vulnerable
to manipulation because traders participate voluntarily, meaning
they may selectively submit only trades that benefit their
positions. Total said in a submission to the forum of global
regulators that the published oil price is wrong “several times
a year.”

Argus and ICIS joined Platts in publishing a self-regulatory code in April 2012 in response to Iosco’s findings.

Iosco, as the securities group is known, is checking if the
industry has met standards designed to counter the threat of
market abuse, Secretary General David Wright said in an
interview today. The Madrid-based group drew up the rules last
year, saying they were needed to wipe out “vulnerabilities”
that leave the door open for market abuse.

Reduce Transparency

“Negative media coverage and fears of heightened
reputational risk could cause more major trading companies to
withdraw from the price reporting process, and that in turn will
reduce transparency in the opaque OTC wholesale energy markets,
potentially compromising the effectiveness of pricing
companies,” Roderick Bruce, an analyst at IHS Energy in London,
said in an e-mailed statement.

Statoil is taking the investigation “very seriously” and
cooperating to the best of its ability, Chief Executive Officer
Helge Lund said today in an interview in Harstad, Norway.

Lund said he’s been given “very limited” information
about which products and markets are being investigated, adding
that it’s “important to underline that this is a suspicion, not
a conclusion.”

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information.